Alios BioPharma: From Startup To Big Pharma

By Scott Westcott, Contributing Editor

If you had told Lawrence Blatt a decade ago that he and his team from then-fledging startup Alios BioPharma would today be working under the Big Pharma umbrella of Johnson & Johnson, he’d likely have written you off as delusional.

After all, to do so required navigating a range of potential obstacles and setbacks. For starters, Blatt and his cofounder, Leo Beigelman, did not start the company with the intentions of ever selling it. Then there was the matter of having to repeatedly secure funding in the midst of a historic recession in order to continue to develop the portfolio of potential therapeutics for viral infections. And finally, a buyer would have to craft a unique proposal that offered compelling selling points beyond a $1.75 billion price tag to convince Blatt and his cofounder to sell.

Yet, that’s pretty much what transpired. The acquisition closed in November 2014, with Alios becoming part of the infectious disease therapeutic area of Janssen Pharmaceutical Companies of Johnson & Johnson. The acquisition included Alios’ portfolio of potential therapeutics for viral infections with the promising compound AL-8176, an orally administered antiviral therapy for the treatment of infants with respiratory syncytial virus (RSV). RSV is the last of the major pediatric diseases that currently has no effective therapy — a fact that makes any potential treatment extremely valuable. The acquisition included two early-stage compounds for hepatitis C (HCV) that have the potential to augment Janssen’s existing HCV portfolio as well. The deal also featured the unexpected aspect of J&J welcoming the Alios team to fully integrate with Janssen and offering them nearly unprecedented autonomy as well as ample support and resources to continue pursuing their promising work without significant interference.

Today — well over a year after being acquired — Alios seems to have integrated smoothly with Janssen in what appears to be one of those rare instances in which an acquisition plays out much like it was outlined in the corporate press release announcing the deal. Blatt serves as global therapeutic area head infectious diseases and vaccines, Janssen Research and Development, and the entire team from Alios remains intact.

“If you come to our building, it still says Alios on the sign, and we are moving forward with our dream of building a world-class portfolio,” Blatt says. “It’s under the J&J flag, but it’s the same team and vision, just with a lot more power and resources.

“No doubt, we’ve had an outstanding outcome. A big part of our success had to do with the quality of the science and the quality of the data that really drove it. And there certainly was luck involved as well.”

Luck perhaps. But a closer look at the Alios story reveals it’s the sort of luck identified in that familiar old adage, “Luck is what happens when preparation meets opportunity.” Blatt and Beigelman launched into their venture with ample preparation and experience and took the steps to ensure they met frequently with opportunity — despite operating in an overall environment in which that opportunity was often in short supply. It’s also a story that affirms those other two factors highlighted by Blatt — good data and solid science — are fundamental must-haves for startups that aim to succeed on their own or ultimately attract the interest of potential buyers.

BIG IDEAS WORTH PURSUING
The Alios journey began in 2006 with the core mission of developing a portfolio of antiviral therapeutics based on nucleoside analogues that can prevent viral replication in infected cells. In addition to their shared research interests, Blatt and Beigelman had history together, having worked together at pharmaceutical companies including another Bay Area company, InterMune.

“Leo and I had worked together for more than a decade and had a number of big ideas that we wanted to pursue, but we wanted to pursue them in our own shop,” Blatt says.

They started Alios with their own money as well as funding from a small group of investors made up of friends and associates. The firm operated virtually for the first two years, with no significant dedicated office or lab space. From the start, the partners were focused on growing a company that could take promising drugs from R&D to product launch.

“Was it our intention to start a company and sell it five years later? Absolutely not,” Blatt says. “Our philosophy was you just don’t do that. Instead, you build the company unless or until it makes sense for someone to acquire it. I think if you don’t have the attitude that you are going to build the business to stand on its own, you are going to skimp. I’ve seen other businesses do that, and it typically doesn’t work out. So we were fully prepared, if needed, to take this thing all the way to product launch.”

By early 2008 they had developed some compelling science and had accumulated enough supporting data to turn their attention to raising Series A funding. They felt confident they were well-positioned to generate serious interest. Yet, what they couldn’t control was the unfortunate timing. By the late summer of 2008, the financial crisis was just unfolding, and the result was a chilling effect through the entire economy. Of course, investment in biotech startups was no exception.

“In the summer of 2008 we were on a strong trajectory,” Blatt recalls. “Then, by the fall, the whole world was falling apart.”

LEVERAGING RELATIONSHIPS TO BEAT THE ODDS
The partners assessed their situation and decided to forge ahead. They had drawn the interest of several investors prior to the market crash and stayed focused on building those relationships — several of which had been established and maintained for many years prior. For instance, they had connections to the Roche Venture Fund, which they had interactions with during their years at InterMune and Amgen.

“I think relationships are so very important,” Blatt says. “The venture capitalists see a lot of good science, but it comes down to whether or not they think that good science can be implemented. They need to feel confident that you can actually get it done.”

In addition to long-standing relationships with key contacts at Roche, there also was a wild card in the mix. Blatt had previously attended the now-defunct annual C21 BioVentures Conference, an event he describes as “speed dating for startups.” One promising connection he made at the event was with representatives from Novartis Ventures. Blatt’s 15-minute pitch was enough for Novartis to see Alios’ potential. So they decided to take the relationship to the next level, setting up subsequent meetings to gain a deeper understanding of Alios’ portfolio. “They ended up being our lead investor in starting off,” Blatt says. “That was pretty encouraging, considering we met them cold at that conference.”

Ultimately, the partners were able to leverage the burgeoning connection with Novartis and the long-term relationships with Roche and other established investors to beat the odds in an environment in which venture funding had all but ground to a halt.

“We were able to get the company funded in spite of the fact that we were probably the only Series A done in the fourth quarter of 2008. If there were others, they were very few,” Blatt says. “I think it came down to long-standing trust. Also, we had innovative ideas, a lot of experience, and a track record of success. Working for other companies, Leo and I had been co-inventors on many patents, some of which are approved drugs today, so I think they could get a real sense that we knew what we were doing.”

‘A PLAN FOR A FULL PORTFOLIO’
With what would amount to $32 million in Series A funding secured, Alios took a big step forward. As the cofounders moved to scale up their business, they found that the dismal economic environment did have an upside. There was plenty of affordable lab space and equipment, as well as an ample supply of talent.

With added staff and resources, they focused on advancing the most-promising programs in their portfolio.

Yet, almost immediately, they faced a challenge. One of their lead programs, a broad-spectrum antiviral that activated a component of the host immune pathway, ran into problems. The initial leads, which had been licensed by the Cleveland Clinic, were unable to be advanced. While later leads showed promising antiviral effects, they came with significant toxicity, resulting in the need to stop the development. While disappointing, for Blatt the setback underscored the importance of having a robust portfolio of potential programs in the pipeline.

“From the start, we had a plan for a full portfolio, because, let’s face it, if you have one program and it succeeds, great. If it fails, you’re done,” Blatt says. “We knew we didn’t want that, which is why we were so focused on building a portfolio of products based on nucleotide chemistry.”

Indeed, the company focused on developing its entire portfolio, and by 2010 experienced success in developing a promising treatment for HCV. To accelerate that effort and access additional funding, they partnered with Vertex Pharmaceuticals in a deal that paid Alios $60 million up front for worldwide rights to two of its preclinical hepatitis C candidates, ALS-2200 and ALS-2158. The Vertex partnership delivered a key injection of undiluted financing in both up-front research funding as well as milestone funding.

GAME-CHANGING RSV TRIAL RESULTS
By early 2014, Blatt and his team were again considering the best path forward to grow the company, so they started the process of seeking Series B funding. Meanwhile, they were making significant progress on several promising drugs, including one that targeted the HCV and another that focused on RSV. The HCV therapy showed real promise, but would require large clinical trials. They viewed their promising work in RSV as best in class. Looking to prioritize and make the most effective long-term move for the company, they decided to establish a partnership for the HCV therapy and hold on to the RSV program.

“It was a move pulled right from George Rathmann’s playbook from the early days of Amgen,” Blatt says, referring to the late chief executive of Amgen, who is widely considered one of the fathers of the biotechnology industry. “Amgen partnered its first assets and held on to later assets. At the time, it made sense for us to take a similar approach.”

They focused energy and resources on RSV, moving the drug through development all they way into a Phase 1 challenge model. At that stage, researchers were able to infect volunteers with the RSV virus to test the effectiveness of the drug. The results were impressive and were recently published in the New England Journal of Medicine. Within a day and a half of receiving the drug, volunteers infected with RSV didn’t show any symptoms and had completely lost the virus. In the placebo group, the virus persisted several days, as did the accompanying symptoms.

“This was pivotal data for us,” Blatt says. “And based on that data, we started to get unsolicited calls from several Big Pharma groups asking if we wanted to partner our assets. We didn’t want to do it. We had money. We had the support of our board. And so we said, no, no, no.”

"Was it our intention to start a company and sell it five years later? Absolutely not."

Lawrence Blatt
Global therapeutic area head infectious diseases and vaccines, Janssen Research and Development

GETTING TO YES
Alios kept saying no as they continued on the track to secure Series B funding. Yet, as interest amped up and broadened, simply saying “no thanks” was becoming increasingly difficult. Alios clearly had something Big Pharma really wanted — badly. Several times they were asked if — since they didn’t want to partner — they would consider selling the company. After consulting with their board, Blatt and Beigelman agreed that the responsible move was to consider all options.

What followed was a heady and, at times, nerve-racking stretch in which Alios moved down several parallel tracks, assessing which one led to the most-promising future. With the recession over, the biotech IPO window was back open, and the potential to go public was real. Meanwhile they also were talking to multiple Big Pharma companies about potentially selling the company.

Ultimately, Alios started leaning toward selling and ended up with seven bids. The majority of the offers were in the same ballpark from a financial perspective. As the partners evaluated the proposals, they looked for a differentiator and found it with J&J. The J&J offer proposed that Alios join with its Janssen group. Yet, unlike typical acquisitions, Alios would, in effect, remain largely autonomous in terms of leadership, staffing, and its approach to R&D. Add to that the $1.75 billion purchase price and the ample global resources of J&J, and it was an offer extremely hard to refuse.

“It was very important that the product get to market, and that we didn’t sell to a company that would mess them up, which can happen, by the way,” Blatt says. “I think it was an unprecedented and brilliant plan that J&J gave us the chance to remain leaders of our program and in fact take over the leadership role for the infectious disease group.”

‘A BIOTECH FEEL INSIDE BIG PHARMA’
Now, almost 18 months after the deal was inked, Blatt says the transition has been remarkably smooth. The Alios team has remained intact and has developed strong partnerships with the Janssen team, as well as received steady support from Janssen leadership. “What I’ve been asked to do is create a biotech feel inside a Big Pharma company,” Blatt says. “Both teams have responded tremendously well.”

Admittedly, Blatt says there is a difference operating in a Big Pharma environment compared to a small startup. Yet, he said adapting to working with more-established corporate policies and procedures has been manageable. “As with anything, there is a tradeoff,” he says. “Was it easier to get things done at Alios? Absolutely. Do we now have more resources and technologies and the capability to do things on a scale that we never could have done on our own? Absolutely.”

Blatt says the “bigger playground” provided by Janssen will ultimately allow Alios to more effectively accomplish what they set out to do more than a decade ago — develop a wide range of antiviral drugs that make a difference in the lives of patients around the globe.

“We had a lot of ideas that we simply couldn’t work on when we were small and on our own,” Blatt says. “In the J&J environment we’re able to build out a portfolio that I think is industry leading. When I look back and think what happened between 2008 and 2014, it’s really remarkable. We have a great team that stayed focused and helped make this happen. We’re in a good place.”